Qantas frequent flyer float plan put on ice

Michael Smith and Jamie Freed

Qantas Airways will formally shelve plans for a partial float of its $2.5 billion loyalty business next week, ending months of speculation about whether the airline will reduce ties with one of its most profitable businesses.

It is understood management will tell the board it does not want to pursue a partial float or trade sale of Qantas Loyalty after examining the option for the past nine months.

The decision is expected to be ­supported by the board, which will meet next week ahead of the airline’s annual results release next Thursday.

Qantas has been exploring floating 30 to 40 per cent of the airline’s ­10 million-member frequent flyer program in a process being run by Macquarie and Citi. Analysts estimate the entire ­business is worth between $2.5 billion and $3 billion.

The move was part of a wider ­strategic review. Other options, such as splitting the domestic and international business to attract more foreign investment, remain under consideration. But it is understood the frequent flyer portion of the review will be formally killed off after a board decision next week.

A trade or private equity sale of ­Qantas Loyalty was ruled out earlier in the review because potential buyers wanted more than 50 per cent ownership of the business and the airline was unwilling to relinquish control.

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Qantas chief executive Alan Joyce is expected to announce the decision on August 28 when the airline releases its annual results and gives the market an update on the structural review and its transformation program, which is aiming to cut $2 billion of costs over the next three years.

Qantas on Wednesday declined to comment when asked about the status of the loyalty business review.

The Australian Financial Review’s Street Talk column had on Wednesday reported a partial float appeared increasingly unlikely.

While a float was expected to attract strong demand from new investors, it is understood management concluded the risks of selling a strong earnings and cash flow stream outweighed the short-term benefits. The main upside was short-term cash to reduce debt and unlocking value in the division which is worth more than Qantas’ entire market capitalisation.

While some shareholders were open-minded about the idea, the potential threat of reduced earnings was also seen as a negative.

Qantas has doubled the membership of the loyalty program from 5 million in 2008 to more than 10 million.

The division posted a record first-half result in February, with underlying earnings before interest and tax at $146 million, up 7 per cent from the prior year. Underlying EBIT in the 2013 financial year rose 13 per cent to $260 million.

Many analysts did not support selling the business, warning it would be a quick-fix solution for the balance sheet in the short term but undermine the airline in the longer term.

“We believe existing shareholders run the risk of divesting a business they already own to pay down debt and to pay for a cost out program that ultimately may not generate as good a return as the Qantas Frequent Flyer business,” Shaw Stockbroking analyst David Fraser told clients.

The division’s link to the airline was also viewed as too important to water down. The business receives revenue from selling frequent flyer points to Qantas and to outside partners like credit card companies, Woolworths and other retailers.

A float of the business would have required Qantas Loyalty to strike a firm agreement with Qantas on the ­percentage of seats available for ­frequent flyer redemptions, as has occurred with other airline loyalty ­program floats in Canada and Brazil. While members can earn points with 100 partners, flights still account for about 80 per cent of redemptions for Qantas Loyalty.

The decision to shelve a float of Qantas Loyalty is likely to be supported by the airline’s largest shareholder, Balanced Equity Management. Investment manager Andrew Sisson earlier this year said he would keep an “open mind” about the prospect of a float, despite being opposed to the sale when it was raised as a possibility in previous years.

However, there were doubts in the market about whether any details or reasoning could satisfy his concerns over whether it would prove value-adding in the longer term.

BT Investment Management and Colonial First State, which had been open to the idea of a float on the basis that it would unlock value in the business, have both since sold down part of their stakes. Qantas has been looking at other options for improving its balance sheet, including the sale of airport terminal leases in Sydney and Melbourne, following the sale of its Brisbane lease in February. Talks with Sydney Airport and Melbourne Airport are advanced, but no sales agreement is expected to be reached by next week.

Qantas is expected to report a full-year pre-tax underlying loss of $750 million next week, but the bottom line loss could surpass $1 billion including restructuring charges and impairments. The loyalty business is expected to be the airline’s most profitable division.

The management team will be under pressure to provide more details about its plans to slash controllable costs in its international division by one-third, or $1 billion a year.

A fund manager with shares in Qantas this week said there was not yet enough detail to make a call on whether such cuts could be achieved. “They are have to give some sort of guidance on these sorts of things [next week] I would have thought,” the fund manager said.